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Inflation climbs back to 2.9%

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Written by: Paloma Kubiak
12/09/2017
Inflation hit 2.9% in August, matching May’s four-year high, according to official statistics.

The Consumer Price Index (CPI) rose from 2.6% in the previous month, the Office for National Statistics has confirmed.

The main contributors to the uptick in prices were the rising costs of clothing and petrol. The holiday season also saw a rise in air fares.

UK consumer price inflation including owner occupiers’ housing costs (CPIH) came in at 2.7% in August, up from 2.6% in July.

With the inflation rate far out-pacing the growth in wages, economists suggest now may be the time for the Bank of England to raise interest rates.

Maike Currie, investment director for personal investing at Fidelity International, said: “Whether or not the Bank talks tough, there is little sign that markets are ready to buy it. In fact the difference in outlook between the bank and investors is becoming pronounced – despite the Bank’s repeated warnings about needing to raise rates sooner and faster than markets expect, markets are pricing in that they will stay at their current 0.25% level until the end of 2018, and not rise above 0.5% until 2021.”

Currie added that fleeting inflation and tepid economic growth means the Bank of England is unlikely to turn off the taps of monetary stimulus too quickly.

“Despite the hawkish crows, the doves should continue to rule the roost. That’s good news for borrowers, bad news for those leaving their money languishing in cash.”

Ben Brettell, senior economist at Hargreaves Lansdown, said it looks likely inflation will fall back in the coming months, as the effect of Brexit-induced sterling weakness falls out of the year-on-year calculation.

“Indeed it’s possible that 2.9% will be the highest we see in the current cycle. Mark Carney will certainly be hoping so, as it will save him the trouble of writing to the chancellor to explain himself.

Brettell added that beyond the currency effect there appear to be few underlying inflationary pressures.

“Labour costs are the main factor in domestic inflation, and growth here remains below long-term averages. Furthermore we need to consider demographics. The baby boomers are retiring in their droves. They have already gone through their consumption phase – they have bought their houses, cars and consumer goods. The generation behind them is saddled with debt and struggling to get on the housing ladder.

“All in all I see more deflationary forces than inflationary in the world economy at present.”

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